The Fall semester has proved to be busier than I thought it would be. However, I really do want to come back to this blog, and a paper about inequality I encountered today gave me the push I needed.

The paper is Experienced inequality and preferences for redistribution by Cristopher Roth and Johannes Wohlfart, Journal of Public Economics 167 (2018) 251-262.

The authors use large national datasets to examine the following question: if someone experienced higher inequality when growing up, will they be more or less in favor of redistribution?

Their answer surprised me. Quoting from the abstract of the paper:

people who have experienced higher inequality during their lives are less in favor of redistribution, after controlling for income, demo- graphics, unemployment experiences and current macroeconomic conditions. They are also less likely to support left-wing parties and to consider the prevailing distribution of incomes to be unfair. We provide evidence that these findings do not operate through extrapolation from own circumstances, perceived relative income or trust in the political system, but seem to operate through the respondents’ fairness views.

(Roth and Wohlfart 2018, abstract)

People who grew up experiencing higher inequality demand less redistribution? Of course that is fine if you think of those in the top of the distribution, but the way inequality has developed in a skewed manner in most countries, the majority of the people should be in a less advantageous position and might be expected to have a desire for redistribution policy to reduce the inequality. But they don’t! The authors offer this potential explanation:

One plausible interpretation of these findings is that growing up under an unequal income distribution alters people’s perception of what is a fair division of resources, and thereby reduces their demand for redistribution.

(Roth and Wohlfart 2018, Page 252)

This is like thinking of slaves becoming used to the chains and eventually fond of them. I want to absorb the message of this paper more deeply, at least for my forthcoming class on economic inequality in the Spring 2019 semester, and if I have further thoughts to share on this blog, I will do so.

The average person who has taken at least one introductory economics course might well be bewildered by the main economic idea in this book. It posits that private property of assets is a deep-seated, powerful source of monopoly power that undermines competition in economic markets. So reform private property, they argue. How? Didn’t we learn in school that without well-defined and well-enforced property rights perfect competition cannot take root?

The idea is not to abolish private property, however. It is to reform it drastically. Each person would publicly state the value of every asset they own. They would then be taxed on this. A wealth tax, you say, big deal, nothing new. What’s to prevent one from undervaluing their holdings to lessen their tax burden? The other part of this tax proposal, that’s what. Once you have declared a value for each of your assets, you must be willing to sell it for that amount to anyone willing to pay it. Technology, perhaps in the form of a smartphone app, would take care of the technicalities; something like Uber for trading houses.

The proceeds from this wealth tax can be used for public projects, perhaps funding a universal basic income, while the tax system would allow the efficient allocation of assets. So far, so Henry George in a modern guise. (And I learned from this book something really new to me: that no less a well-regarded economist than Léon Walras had ideas similar to those of Henry George on taxing land.)

But that’s not all! Posner and Weyl also want to bring into the voting system ideas from the economics of mechanism design. In fact, I only bought the book after I read a short article by Weyl with Steven Lalley on this in the American Economic Review’s Papers and Proceedings for 2018 (an ungated version is here).

Imagine every citizen being given a budget of “vote-buying money”, just as much as every other citizen. They would then be able to spend some of this “money” to buy extra votes for elections that concern issues they care a lot, at the cost of having fewer votes to cast in other elections. The prices of votes wouldn’t be linear, but quadratic. That is, one vote would cost one vote “dollar”, two votes would cost four, three would cost nine, and so on.

Incredibly at first thought, a voting system like this market-inspired one has nice properties in theory. Markets in everything, indeed!

It is natural for this proposal to raise concerns about individual rights, as the review in The Economist points out. However, a radical proposal may well be what we need in our time of political polarization and economic strain for more and more people. I will happily read this book to the end and prepare something to say about it in my economic inequality course. You will probably hear from me about it again in this very website.

In the Spring semester of 2017 I taught an undergraduate course on economic inequality for the first time. Every time I mention this to anyone, they want to know what I put in it. Now that I have a reasonable idea of what worked and what did not in the first outing of this course, I want to share here the basic structure of the course and some of the most important readings in it. To start with, here are the main topics, each with a short explanation and some reading suggestions. I regretted that there was no textbook for this course that presented the material I wanted to teach in the way I wanted to teach it; I have now embarked on writing such a book. (There does exist a huge Oxford Handbook of Economic Inequality, but it is not usable as a textbook, because it emphasizes breadth over depth of coverage and ends up with very brief discussions of difficult topics, that the reader has to work hard to assimilate by reading detailed expositions in the references.)

Course structure, including the main readings

Normative reasons to care about economic inequality. You would think that why an economics student should care about inequality should be obvious to them, but I encountered, before I started the class, the question of why we should care. So I came up with this topic and the next. It didn’t hurt that I have long considered economists, in the main, much too narrow-minded regarding how to evaluate economic allocations from a normative point of view. The superb online Stanford Encyclopedia of Philosophy has an excellent article on distributive justice, with links to other articles on related topics. The Stanford Encyclopedia’s distributive justice article is a good core reading for this section of the course. The main temptation I had to stay away from when teaching this material was to include a serious survey of the voluminous work of the Nobel laureate economist Amartya K. Sen. This work deserves an entire semester for itself. Rather than extract some bits from it without all the context, I minimized references to it, with regret. For the interested reader, the following books by Sen contain a good presentation of his pathbreaking work:Collective Choice and Social Welfare: An Expanded Edition, 2017;The Idea of Justice, 2009;Inequality Reexamined, 1995;Choice, Welfare and Measurement, 1999.
There are more books and articles by Sen and his intellectual interlocutors that arguably belong to this list, but as the list is already too long, I am leaving it as is.

Positive economic reasons to care about economic inequality. “Positive” here refers to “positive economics”, the study of “what is” in the economic sphere. In this usage, “positive” is contrasted with “normative”, the study of what ought to be, which was covered in the previous section with the discussion of distributive justice. This section focuses instead on a large experimental literature that makes up a large part of what is strangely called “behavioral economics”, the literature on the way individuals assess inequality in the way they evaluate economic outcomes. The main reading for this section is roughly the first half of this survey of the literature by Ernst Fehr and Klaus Schmidt. The main conclusion here is that individuals feel a lower level of satisfaction about economic conditions when there is more income inequality, all other things equal, even when they occupy a privileged position in the income distribution. This is not to say that everyone feels this way; rather, that enough people feel this way that force economists to study the topic of inequality because economic agents in the theories that economists build take account of inequality themselves in a way that affects their economic decisions.

Equality of opportunity. When we are discussing economic opportunity, we usually find that even political conservatives mainly agree that individuals are responsible for their economic outcomes to the extent these follow from the individuals’ actions, but not from the individuals’ circumstances at birth that they have no control over (such as the individuals’ race). The intuitively clear way towards equality that this idea suggests is that if we equalize the starting point of everyone, then the inequality of economic outcomes that results from their actions is morally acceptable, as it results from their free agency. The main reading for this topic is the following difficult, but rewarding, article:
John E. Roemer and Alain Trannoy, Equality of Opportunity: Theory and Measurement, Journal of Economic Literature, 2016, 54(4), 1288‒1332.
There is plenty of opportunity to write a more accessible exposition of this topic, and it is part of my plan to do so.

Measurement of inequality. Given a set of data on the distribution of some economic variable, such as income or wealth, across people, how do we come up with a numerical scale to tell is how unequal this distribution is? Several measures have been proposed, and some, like the Gini coefficient, are popular with researchers and writers in the field. An easily digestible exposition (but with a few typos in formulas) is in chapter 6 of:
Debraj Ray, Development Economics, Princeton University Press, 1998.
This set of lecture slides is a good complement to the chapter from Ray’s book, if nothing else, because it corrects the typos.
While we are discussing measurement, I simply must also point out the following online sources of data, in many cases very well presented with interactive graphics:
World Incomes Database: http://www.wid.world/Chartbook on Economic Inequality: http://www.chartbookofeconomicinequality.com/Income inequality from the Our World in Data website: https://ourworldindata.org/income-inequality/
Clearly a data-minded person could structure an entire semester’s course on the material from these three websites alone. I chose to put the material in a broader context, in which I present the data briefly and expect the students to use the data in their term papers, if they choose empirical term paper topics.

Capital and inequality. This section is inevitable, given the enormous success of Piketty’s book Capital in the Twenty-First Century. The book became a surprise best-seller in the aftermath of the “occupy” years and there are several good critical discussions in the literature, including this excellent one by Lawrence Blume and Steven Durlauf:
Blume, Lawrence E. and Steven N. Durlauf, Capital in the Twenty-First Century: A Review Essay, Journal of Political Economy, 2015, vol. 123, no. 4, 749‒777. Available at https://www.ssc.wisc.edu/econ/Durlauf/includes/pdf/Blume%20Durlauf%20-%20Capital%20Review.pdf
Other good pieces in this debate include (I am trying hard to cite as few as possible):
Acemoglu, Daron and James A. Robinson, The Rise and Decline of General Laws of Capitalism, Journal of Economic Perspectives, 2015, 29(1), 3‒28, available at http://economics.mit.edu/files/11348, as well as Piketty’s own rejoinder to his critics,
Piketty, Thomas, Putting Distribution Back at the Center of Economics, Journal of Economic Perspectives, volume 29, number 1, Winter 2015, pages 67‒88.

Globalization and inequality. In the aftermath of Brexit and the 2016 presidential election, I need not tell you why this is an issue of huge concern for the majority of voters in at least the UK and the US. The book by Branko Milanovic, Global Inequality: A New Approach for the Age of Globalization, is the central reading for this section, but one must not miss the critical discussion of this book here and the rejoinder by Milanovic and Lakner here. This debate is about Milanovic’s “elephant graph”, which became practically a meme online. This graph purports to show that the middle classes of rich societies have not kept up with income growth in Asian countries and among the rich in their own societies for a few decades now, hence the massive discontent about globalization one reads about in the press and finds reflected in election results.

Technology and inequality. Robots are after our jobs, says practically everyone, or so it seems after only a few minutes of reading online about automation and its disruptive influence on work as traditionally understood. David Autor (yes, there is no “h” in his last name) has an accessible article that is the core reading for this section, in which he examines the impact of automation on employment and wage dispersion. The main lesson from this article is that the “middle-skill” occupations have been hit hard by automation, losing a lot of jobs, while jobs that need low or high skills have been treated well in terms of numbers of jobs by automation (but in terms of wages, only certain high-skill jobs have been treated well, but then these have been treated really, really well).
Autor, David H., Why Are There Still So Many Jobs? The History and Future of Workplace Automation, Journal of Economic Perspectives, volume 29, number 3, Summer 2015, pages 3-30.
Other readings for the ambitious reader who cares deeply about this topic include
Acemoglu, Daron and David H. Autor, Skills, Tasks and Technologies, from the Handbook of Labor Economics, http://economics.mit.edu/files/11635; also
Webber, Douglas A., Are college costs worth it? How ability, major, and debt affect the returns to schooling, Economics of Education Review, 2016, volume 53, pages 296-310.
For some of the latest on robots, see
Acemoglu, Daron and Pascual Restrepo, Robots and Jobs: Evidence from US Labor Markets, MIT Working Paper, March 2017.

Economic policy against inequality. This topic is certainly one that students waited for eagerly while we were slogging through the theoretical and empirical context just detailed in bullet points 1 through 8. Parts two and three of Atkinson’s book Inequality have an excellent discussion of detailed policy proposals by Atkinson, whose death in the very beginning of 2017 deprived the field that studies economic inequality of one of its founders and intellectual giants. One topic that is bruited about a lot online is universal basic income. Right near the end of the semester the following book came out, devoted to this topic exclusively. It is a good book, and I plan to incorporate it better in future versions of the course, when I will have had time to prepare accordingly.
Philippe Van Parijs and Yannick Vanderborght, Basic Income: A Radical Proposal for a Free Society and a Sane Economy, Harvard University Press, 2017.

Books used

Even though I did not use a book as a textbook, I did refer the students to chapters in the following three books (which have been mentioned above). After teaching the course once, I decided that, although I will cite Piketty’s book among these three, I will only assign readings from the other two books.

Atkinson, Anthony, Inequality: What Can Be Done? Harvard University Press, 2015.

Milanovic, Branko, Global Inequality: A New Approach for the Age of Globalization, Belknap / Harvard, 2016.

This essay by Elizabeth Currid-Halkett points out how Veblen’s old ideas about conspicuous consumption have evolved and are now sustaining a social abyss that separates our society along the dimensions of social stratification. Well worth reading!

I just came across this post from 2014 by Francois Badenhorst via a post by Evonomics. (I linked the original.) It is a quick profile of Sam Bowles, a well-known scholar preoccupied with the question of inequality. Just like Amartya K. Sen, I recommend Badenhorst’s post because it gives a succinct introduction to the work that Bowles has been doing.

A personal high point is where Bowles talks about his being one of the very first “mathematizers” of economics in the US. I agree completely with him that using rigorous mathematical techniques in economics promotes inttellectual honesty and productivity, provided it does not lead us to ask progressively narrower questions. Both Bowles and Sen are exemplars of asking deep, important questions about inequality and cooperation in economics, using deep mathematics to reach surprising answers.

I post this specifically today because Bowles mentions to Badenhorst an interaction with Dr. Martin Luther King, Jr. Read the post at the first link above to learn all about it!

I have written here about reading Harari’s book Sapiens. I have finished the book since that post appeared. Now, separated from the time of finishing the book by a few days, in which I spent a lot of time reading graduate student dissertation proposals and writing lecture notes, I thought I would write down my lingering impression from the book.

This impression is bleak. The various revolutions Harari talks about left individual members of Homo Sapiens less well off than before, with the Agricultural Revolution as a prime example. Even worse were the effects of these revolutions (Cognitive, Agricultural, Industrial) on other species on planet Earth.

A secondary impression I got was one of a fundamental tension between Harari’s portrayal of history as proceeding without regard to what is good or bad, for humans or other species, and constantly talking about effects of historical changes as good or bad. I am perfectly content to read normative statements in a book on history (or economics, as a matter of fact), but I want a clearer idea of the author’s ethical convictions. Harari does not elucidate a moral philosophy, but one seems to be in the background, one that I would have liked to be made clearer.

Kevin Bryan posted about a new paper by Daron Acemoglu and James Robinson that is a response to Piketty’s much-ballyhooed book on Capitalism. The post is very well done and I have downloaded the paper from the link supplied there, to read when the rush to get ready for the fall semester is past.

Daron Acemoglu, James Robinson, and Thierry Verdier have a new paper out that is getting a lot of attention in the economics blogosphere, rightly so. The paper can be found here. I want to make some comments of my own here, as well as drum up attention to the paper.

Acemoglu, Robinson, and Verdier present some evidence based on patents to argue that the US has been more innovative than the Scandinavian countries. They do so even when there are well-known problems with using patents to measure innovation. To their credit, after they present their theoretical model, they state that they hope it will spur more detailed empirical research. The theoretical model itself is based on a standard endogenous growth theory foundation, with some moral hazard thrown in to capture a very mainstream-economics view of innovators. Because of the moral hazard problem, innovators must be given the proper incentives or innovation will suffer.

The other crucial ingredient in their model is a spillover effect from more innovative economies to less. Their main point can be summarized as saying that economies with big social safety nets can be as innovative and wealthy these days because they enjoy innovations developed in economies with much less of a social safety net (and more income inequality) such the US’s. The development of the model is as masterful as one can expect from a group of authors that includes the author of the most advanced recent graduate-level textbook on economic growth (and Clark Medal winner in 2005, to boot).

I turn now to some of the discussion on economics blogs that I have seen in my RSS feeds, as some of the commentary is very good. First, let me start with the homo economicus assumption made in the paper (along with 99% of papers that use math-heavy economic theory, as it seems to me). It makes the protagonists, the would-be innovators, a bit too one-dimensional for believability. OK, you say, so what, if the model captures the aspect of economic arrangements it wants to capture, and does it well? But it does not, precisely because of this one-dimensionality. As a commenter (going by the name “ralmont”) to this post by Mark Thoma correctly pointed out, one of the most important innovations of the last two decades or so has been the development of Linux, on which run most of the web servers in the world, as well as the many, many phones and other devices that run Android. But Linux came out of the “cuddly” capitalism of Scandinavia (and indeed, from a then 21-year old student who opened it up to the world not in order to get rich but to learn and because he loved to tinker with operating system software). The standard one-dimensional model of economic man (the term was made up in backward times and I am keeping its gender slant on purpose, as a criticism) simply does not apply here. Also, by the nature of Linux (and all free/open source software), there is no point to going to look for a patent by which to measure the momentous impact of this development on economic growth.

In the body of the same post just discussed, Mark Thoma also says this:

An enhanced safety net — a backup if things go wrong — can give people the security they need to take a chance on pursuing an innovative idea that might die otherwise, or opening a small business. So it may be that an expanded social safety net encourages innovation.

I think I can let this stand with no further comment from me; it is so well-stated and I find it convincing.

Another blog post well worth mentioning here is one by Lane Kenworthy, a discussion of which started the Mark Thoma post I just discussed. Kenworthy makes many good points. One is that by a measure other than that of patents (the World Economic Forum’s Global Competitive Index), Scandinavian countries are almost as innovative as the US. Another is that in the 1960s and 1970s there was plenty of innovation in the US, even though that period offered less in terms of incentive to overcome the innovators’ moral hazard. A third point is that other countries with a lot of income inequality are not as innovative as as the US, so inequality does not always provide an impetus for innovation. (I can already anticipate that Acemoglu would construct a defense on this point by discussing extractive institutions, in the sense expounded in his book with Robinson Why Nations Fail, and indeed I will be looking forward to rebuttals to this criticism in the blog of the same name. I have a lot more to learn from that book and blog, which I hold in high regard—I am not writing here to bash Acemoglu and friends.) Finally, Kenworthy makes a direct comparison between the US and Sweden based on data and finds little reason to buy the story of the Acemoglu, Robinson, and Verdier paper.

Commenter “cfaman” to the Kenworthy post disputes the view of the US in the paper as not cuddly capitalism, by this:

But we are cuddly! I have a hard time thinking about innovations that have made a big difference since WWII that have not come directly our of government investment or substantially encouraged by government investment.

[…] finding relies on a model that doesn’t so much compare the American economy to social democracy as a stylized version of the American economy to actual socialism.

Well, of course, they are doing economic theory and you have to give license to theorists to simplify. But Matthews has more to say. In particular, he notes that the definition of “cuddly capitalism” in the paper

requires that there be literally no difference between successful and unsuccessful entrepreneurs’ income levels.

Here the theorist’s license to simplify may have gone too far. Scandinavian countries are not like this; in all of them successful entrepreneurs can make money, if not as much as in the US, enough to be very rich.

Matthews also offers evidence that Scandinavia is doing well compared to the US on innovation, and also points out, as the others I already mentioned did, that patent trolls and the general malaise of the US patent system makes using patent date highly suspect. Finally, he points out that even using the patent measure, the US did not become more innovative relative to Sweden countries as the US level of inequality soared in recent decades. Matthews concludes that the model of the paper does not hold because of this.

All in all, reading the debate has made me think more about innovation and for this I am thankful to Acemoglu and company. Graduate students inspired by the paper will doubtless learn a lot about how to theorize on economic growth; Acemoglu is a world-class master there. But I hope that the Acemoglu, Robinson, and Verdier plea for more empirical work on this takes precedence over theoretical refinements of the model for now. Young economists looking towards a good area for research, this is about as good as it gets. Crank up your statistical software, gather appropriate data, and go! I can imagine good ways to improve the theory in the paper, but only after it’s been bashed around a bit by the econometricians.